Today, the payday lending industry is regarded as one of the fastest growing credit businesses in the market. Though most of these payday installment loans come with up to 4,000% APR interest, many people are still using these financial services not just for borrowing, but also as one way of boosting their credit rating. But do payday installment loans work in improving poor credit?
Let us first lay down the facts about payday lending and credit scores. Basically, the act of requesting a payday installment loan itself has no negative or positive effect on credit ratings whatsoever. Also, because payday lenders don’t require a credit check, these loans generally aren’t included in your credit score. Most lenders of payday installment loans do not perform credit checks or report to the major credit bureaus because their borrowers tend to have poor credit. Thus, the credit bureaus are unlikely to find out about the loan application when you repay according to the schedule on the loan agreement.
Not repaying a payday installment loan or falling behind on the payment plan can cause the loan to be reported on your credit report and affect your credit ratings. This is because the loan company might sell the account to a debt collector. Usually, debt collectors report delinquent accounts to the credit bureaus. These collection accounts are very damaging items to have on any report regardless of the amount of the payday installment loan. Only when a payday installment loan has an original balance of less than $100 does the FICO credit scoring model ignore it.
There are some cases when payday installment loan applications do go into your credit file. This means that when you apply for a loan, the application usually goes into your credit file and when it is paid off it also shows on the report. Thus, repaying on time is very positive. There are no hard or fast rules when it comes to credit ratings. Each payday lender scores you differently based on their own standards of what they view as a profitable customer.
This is to say that credit scoring works on behavioral predication or lenders use the way you’ve acted in the past to predict your likely future behavior and thus calculate whether they’ll make money from you. In general, paying off credit on time shows you’re more reliable, so this will have an impact.
Technically, getting a payday installment loan may help improve your poor credit score, which in turn could make it easier and cheaper to get other products such as mortgages. However, take note that payday installment loans are expensive and risky. The interest rates on these loans may be unbearable. The actual cost over a short term loan may not be too bad, but the longer you delay your payment the costlier it gets.
If you are thinking of improving your poor credit score, then explore first all options before applying for a payday installment loan, as suggested by the Federal Trade Commission. Not in all payday installment loans help boost your credit ratings. If you have trouble improving your credit scores, seek advice from nonprofit credit counselors.